MOSL: SUN PHARMA (BUY)- Weak quarter-margin improvement is key

​Sun Pharma: Weak quarter; margin improvement is key

(SUNP IN, Mkt Cap USD22.0b, CMP INR569, TP INR650, 14% Upside, Buy)

• Weak operating performance: 4QFY17 revenue declined 6.5% YoY to INR71.4b (~9% below est.). Gross margin contracted ~300bp QoQ/1,300bp YoY, primarily due to one-time inventory write-off of ~USD45m and muted US revenue (-34% YoY). EBITDA margin came in at 21.7% (adj. for inventory write-off at 25.7%). PAT stood at INR12.2b (~16% miss).
  
• US continues to underperform; recovery expected from FY19: US business declined 25% YoY to USD381m in 4QFY17, led by pricing pressure in the base business, competition in gGleevec, gBenicar AG & Taro portfolio, and deferment of the launch of gGlumetza. We expect ~15% decline in US sales in FY18 due to pricing pressure in SUNP and Taro portfolio, partially offset by key launches such as Xelpros, Elepsia, Glumetza and Odomozo ramp-up. We expect a pick-up in US sales from FY19, driven by Halol resolution and commercialization of Tildrakizumab (FY19 beginning)/Seciera (2HFY19E).
  
• Earnings call takeaways: (a) FY18 guidance: Revenue may decline due to challenges in the US (assuming no new approval from Halol and no disruption at Dadra). (b) Tildrakizumab NDA launch expected by early 2019. (c) Process initiated to shift key products like Xelpros and Elepsia from Halol. (d) Two thirds of Ranbaxy integration benefit came in FY17; rest expected in FY18. (e) Pre-NDA meeting for Seciera done; SUNP is planning to file in 3QFY18; launch in 2018E. (f) Gleevec launch in FY18E.